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Fraser Forum

September/October 2010 $3.95

A Fraser Institute review of public policy in Canada

LABOUR MARKETS Right-to-work laws Creating a dynamic labour market

Canadian Publication Mail Sales Product Agreement Number 40069269.

Living wage policies


From the editor

Fraser Forum Publisher Chief Editor Managing Editor Editorial Advisor Coordinating Editor Contributing Editors Art Direction and Cover Design Cover Photos Production and Layout Media Relations Advertising Sales

Fraser Institute Brett J. Skinner Kristin Fryer Kristin McCahon Amela Karabegović Peter Cowley Diane Katz Fred McMahon Bill Ray Fotolia, iStockphoto Kristin Fryer Dean Pelkey Advertising In Print Tel: (604) 681-1811 E-mail: info@advertising inprint.com

The Fraser Institute’s vision is a free and prosperous

world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals. Founded in 1974, we are an independent Canadian research and educational organization. Our work is financed by tax-deductible contributions from thousands of individuals, organizations, and foundations. In order to protect its independence, the Institute does not accept grants from government or contracts for research.

For additional copies, or to become a supporter and receive Fraser Forum, write or call the Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC  V6J 3G7 Telephone: (604) 688-0221; Fax: (604) 688-8539; Toll-free: 1-800-665-3558 (ext. 580–book orders; ext. 586–development) Copyright © 2010 Fraser Institute ISSN 0827-7893 (print version) ISSN 1480-3690 (online version) Printed and bound in Canada.

Return undeliverable Canadian addresses to: Fraser Institute, 4th Floor, 1770 Burrard Street Vancouver, BC V6J 3G7 The contributors to this publication have worked independently and opinions expressed by them are, therefore, their own and do not necessarily reflect the opinions of the supporters, trustees, or other staff of the Fraser Institute. This publication in no way implies that the Fraser Institute, its trustees, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate. Fraser Institute Board of Trustees Peter Brown (Chair-

man), Edward Belzberg (Vice Chairman), Mark W. Mitchell (Vice Chairman), Salem Ben Nasser Al Ismaily, Louis-Philippe Amiot, Gordon Arnell, Charles Barlow, Jr., Ryan Beedie, Brad Bennett, Everett Berg, T. Patrick Boyle, Joseph Canavan, Alex Chafuen, Derwood Chase, Jr., James Davidson, John Dielwart, Stuart Elman, Greg Fleck, Paul Fletcher, Shaun Francis, Ned Goodman, John Hagg, Paul Hill, Stephen Hynes, Robert Lee, Brandt Louie, Lukas Lundin, David MacKenzie, Hubert Marleau, James McGovern, George Melville, Gwyn Morgan, Eleanor Nicholls, Roger Phillips, Herb Pinder, R. Jack Pirie, Conrad Riley, Gavin Semple, Rod Senft, Anthony Sessions, Christopher Shackleton, Bill Siebens, Anna Stylianides, Arni Thorsteinson, Michael Walker, Jonathan Wener, Catherine Windels, Brett J. Skinner (President), Peter Cowley (Senior Vice President, Operations), Michael Perri (Secretary-Treasurer)

O

ver the past two years, the Canadian job market has had its ups and downs. For example, in July 2008, before the recent economic downturn, the national unemployment rate stood at 6.1%; at the height of the recession, unemployment reached 8.7%. But since the recession ended last year, Canada’s labour market has rebounded. In the first half of 2010, nearly 300,000 jobs were created and the unemployment rate now sits at 8.0%. Signs of recovery are common in many places—shops have posted “help wanted” signs in the windows, construction sites are active again, and the number of people receiving employment insurance (EI) benefits has declined. These signs of improvement are encouraging, but now is not the time for Canada to rest on its laurels. There are a number of policies that our governments could adopt to create a vibrant and more dynamic labour market. One of these policies—and the focus of this issue of Fraser Forum— is worker choice laws. Canada does not yet have worker choice laws. Under our current labour laws, a worker who joins a unionized firm is forced to become a union member and pay dues as a condition of employment if his collective agreement has a mandatory union membership clause (“The power of worker choice laws,” pg. 15). In contrast, worker choice laws prohibit mandatory union membership clauses and union dues payments; instead, these laws give employees the right to decide whether or not to join or financially support a union. Such a dramatic change may not sit well some groups, but the benefits of worker choice laws are clear and well documented. In the United States, 22 states have worker choice or “right-to-work” laws and the results are astounding (“Right-to-work laws and economic growth,” pg. 13). First, when given the choice, far fewer workers choose unionization. In 2009, worker choice states had an average unionization rate of 8.0%; the rate in non-worker choice states was 16.5%. Second, the appeal of worker choice laws is so great that these laws actually affect migration in the United States. As Richard Vedder notes in this issue of Forum, some five million Americans have moved from the 28 non-worker choice states to the 22 worker choice states over the last 10 years. Observing this statistically significant relationship between migration and the presence of worker choice laws, Vedder concludes that “Americans flatly prefer a legal environment where the sale of their labour services is not constrained by laws requiring union dues payment” (pg. 13). How many Canadians would agree? Research shows that worker choice laws lead to lower unemployment, higher incomes, and more capital investment. If Canadian governments want to improve our labour markets, they should consider implementing worker choice laws.

Giving workers a choice

Kristin Fryer (fraserforum@fraserinstitute.org)

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Fraser Forum September/October 2010

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Fraser Forum

Contents 18

Living wage policies

1

From the editor

4

Forum authors

5

Sustainable water exports Diane Katz Canada has abundant supplies of unspoiled surface water and ground water, and bulk exports could be environmentally sustainable.

8

Squandered gains Niels Veldhuis and Jason Clemens Finance Minister Flaherty’s claim that stimulus spending is behind Canada’s economic resilience misses the truth.

25

Contraband tobacco

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The long-form census is too intrusive Niels Veldhuis and Charles Lammam

30 2

Remembering Milton Friedman

Fraser Forum September/October 2010

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Quarterly Research Alert

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Contraband tobacco in Canada

Our researchers summarize the findings of recent studies on important topics, including tax policy, government performance, and social policy.

Nachum Gabler and Diane Katz Research shows that tobacco excise taxes are a primary factor in the development and persistence of the contraband market.

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LABOUR MARKETS

Milton Friedman’s ideas are alive and well Brett J. Skinner As we witness governments increasing public debts and clinging to the fallacy that government spending can stimulate economic growth, it is critical that we consider the merit of Friedman’s thoughts on freedom and the unintended consequences of government intervention in the economy.

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Amela Karabegović Current labour policies in many provinces and at the federal level are biased and overly prescriptive, diminishing the flexibility of Canada’s labour market.

No need to fear the HST Niels Veldhuis and Charles Lammam debunk several myths about British Columbia’s new harmonized sales tax.

Creating a vibrant, dynamic labour market

13

Right-to-work laws and economic growth Richard Vedder If the provinces want to attract workers, lower unemployment, increase incomes, and attract more capital, they should move towards implementing right-to-work laws.

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The power of worker choice laws Alex Gainer and Amela Karabegović It is time for Alberta to reconsider worker choice laws and become the leader in Canada in adopting policies that foster a thriving economy.

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Should more cities implement living wage policies? Niels Veldhuis and Amela Karabegović Living wage laws do not reduce poverty. Instead, they rob low-skilled workers of the opportunity to participate in the labour market.

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Fraser Forum September/October 2010

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Forum Authors Alex Gainer (alex.gainer@fraser

Amela K arabegović (amela.kara

institute.org) is a Research Economist in the Fiscal Studies Department at the Fraser Institute. He holds an M.A. in economics from the University of British Columbia.

begovic@fraserinsti​t ute.org) is a Senior Economist in the Fiscal Studies department at the Fraser Institute. She has an M.A. in economics from Simon Fraser University.

Richard Vedder is a Distinguished Professor of Economics at Ohio University in Athens, Ohio, and an Adjunct Scholar at the American Enterprise Institute.

Niels Veldhuis (niels.veldhuis@ fraserinstitute.org) is the Director of Fiscal Studies and Vice President, Canadian Policy Research, at the Fraser Institute. He has an M.A. in economics from Simon Fraser University.

Contributors Jason Clemens is the Director of Research at the Pacific

Research Institute. He is a former Director of Fiscal Studies at the Fraser Institute and is now a Senior Fellow. He holds a Master’s degree in business administration from the University of Windsor.

Nachum Gabler (nachum.gabler@fraserinstitute.org)

is an economist in the Centre for Risk, Environment, and Energy Policy and the Centre for Canadian-American Relations at the Fraser Institute. He holds a B.A. (Hons.) from York University and an M.A. from Boston University, both in economics.

Diane K atz is a Research Fellow in Regulatory Policy with the Heritage Foundation. She is a former Director of Risk, Environment, and Energy Policy Studies at the Fraser Institute. She has an M.A. from the University of Michigan.

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Fraser Forum September/October 2010

Charles L ammam (charles.lam​mam@fraserinstitute.

org) is a Policy Analyst in the Fiscal Studies Department at the Fraser Institute. He is completing an M.A. in public policy at Simon Fraser University.

Milagros Palacios (milagros.palacios@fraserinstitute. org) is a Senior Economist in the Fraser Institute’s Fiscal Studies Department. She holds an M.Sc. in economics from the University of Concepcion in Chile. Brett J. Skinner (brett.skinner@fraserinstitute.org) is the President of the Fraser Institute and the Director of Health Policy Research. He obtained his Ph.D. in public policy and political science from the University of Western Ontario.

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Sustainable water exports

Fotolia

The benefits of engaging in bulk water trade

Diane K atz

T

he Harper government recently tabled legislation (Bill C-26) that would broaden prohibitions against the bulk removal1 of water from Canada. A plain reading of the bill reveals a number of loopholes by which bulk water exports could occur, prompting urgent pleas from some alarmist groups for more stringent measures. But as a recent Fraser Institute study on the issue documents, opposition to bulk water exports is enveloped in environmental alarmism and protectionism. In reality, Canada is blessed with abundant supplies of unspoiled surface water and ground water, and bulk exports could be environmentally sustainable (Katz, 2010). Existing federal law prohibits bulk water removal from “boundary” waters such as the Great Lakes and other waters that intersect the Canadian and US borders. The proposed Bill C-26 would impose the same prohibition on “transboundary waters,” which are rivers and streams that flow across the international

boundary. All provinces, with the exception of New Brunswick, also prohibit bulk exports from waters within their jurisdiction.2 Canadian opposition to bulk water exports runs deep. Bombarded with baseless claims of widespread water depletion and degradation, citizens understandably feel protective of the natural resource they value most.3 Notwithstanding relatively minor shortages, however, Canada is rich in water wealth, ranking third worldwide in the most “renewable”4 fresh water, behind Brazil and Russia (Environment Canada, 2009c). Indeed, the country features more lake area than any other country on Earth (Environment Canada, 2009c)—some two million lakes in total, of which 563 span more than 100 square kilometres (Environment Canada, 2006). Chief among them, of course, are the Great Lakes, which hold an astonishing one-fifth of the world’s total fresh surface water (table 1).

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Withdrawals and consumption of Great Lakes water have actually decreased by 48% in recent decades (International Joint Commission, 2000). This decrease is largely the result of technological innovations, many of which also improve the quality of water discharged back to the basin. Enormous quantities of water also run through Canadian rivers, which discharge a remarkable 105,000 cubic meters of water per second.5 Even greater volumes of groundwater lie beneath the land surface (Environment Canada, 2006), although this volume has not been systematically mapped or measured. Opponents of water exports contend that Canada is not actually a water-rich country because 60% of its fresh water drains to the north, while three-quarters of the population is concentrated within 160 km of Canada’s southern border with the United States (Environment Canada, 2009c). Therefore, they argue, water

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Table 1: Quantity of water in Canada’s Great Lakes

Superior

Maximum depth, m

Total area, km2

Volume (low water datum), km3

406

82,100

12,100

Michigan

282

57,800

4,920

Huron

229

59,600

3,540

64

25,700

484

244

18,960

1,640

Erie Ontario

Source: Environment Canada, 2006.

Figure 1: Fresh water area by province or territory 200

150 km2

shortages loom in Canadian population centers. By extension, then, great quantities of Canada’s renewable fresh water go unused by humans. The absence of bulk water exports evidently has not prevented spot shortages from occurring in Canada. Therefore, shortages will not be prevented or remedied by prohibiting uses of water where it is abundant. Bulk exports of water would only be problematic if there was insufficient water in total to meet domestic needs. However, water can be rechanneled between drainage basins, which already occurs in considerable quantities for hydro-electric power (Environment Canada, 2004). Indeed, the country’s topography is particularly well-suited for such diversions, although care must be taken in the execution to minimize environmental impacts. As figure 1 shows, water resources do vary across Canada. Many of the temporary shortages that occur in Canada are largely the result of water system mismanagement (Anderson and Hill, 1997). For example, up to 30% of the total water entering supply lines is lost due to leaks in poorly maintained infrastructure (Environment Canada, 2009b); older systems may lose as much as 50% (Hunaidi, 2000). Further, water subsidies and inadequate pricing promote careless water use by households, industry, and agriculture. Indeed, Canada ranks second worldwide in per capita water consumption (Environment Canada, 2009c). Opponents to bulk water exports claim that permitting exports would induce the United States to “suck Canada dry.” But water exports could be undertaken responsibly. Water rights could be “unitized”—that is, defined as a proportion of water volume based on specific environmental standards, such as in-stream flows for

100

50

0

NL PEI NS NB QC ON MB SK

AB BC

YT

NT NU

Source: Statistics Canada, 2005b.

fish and volumes sufficient for dilution of contaminants. Such calculations would necessarily be customized to the particular water bodies from which water was to be with drawn. Distinctions could also be made between renewable and nonrenewable volumes in lakes, rivers, and groundwater. Water rights also could be apportioned based upon the volume of water conserved. For example, those who held water rights could be authorized to

Fraser Forum September/October 2010

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sell the water they conserve from their allotment. The tort system would provide relief to those whose water rights were abridged by illegal withdrawals. The author’s analysis of water supplies and demand suggests that there are substantial opportunities for the sustainable export of renewable fresh water, as well as for the redistribution of water from conventional uses through increased efficiencies. Given the potential benefits of engaging in water trade,


a fact-based reconsideration of the issue is warranted.

Notes 1 Bill C-26 defines “bulk removal” as “the removal of water from boundary or transboundary waters and the taking of that water, whether it has been treated or not, outside the Canadian portion of the water basin … (a) by any means of diversion, including by pipeline, canal, tunnel, aqueduct, or channel; or (b) by any other means by which more than 50,000 L of water are taken outside the water basin per day. Bulk removal does not include the taking of a manufactured product that contains water, including water and other beverages in bottles or other containers, outside a water basin.” 2 There does exist a variety of exceptions under provincial laws. For example, Quebec law allows bulk exports for the production of electricity. The water statutes in Alberta, Manitoba, and Nova Scotia also allow exceptions to be granted by the cabinet or legislature (Johansen, 2008). 3 In a poll conducted for Policy Options, nearly 62% of respondents cited water as Canada’s most important resource (Nanos, 2009). 4 The “renewable” supply of fresh water is composed of surface water (the precipitation that does not permeate the land surface, but which flows into streams, rivers, and lakes, and ultimately the ocean) and groundwater recharge (the precipitation that seeps into the ground). 5 One cubic meter per second (m 3/s) would fill 1,000 rail tank cars in a single day (Environment Canada, 2006).

References Anderson, Terry, and Peter Hill (eds.) (1997). Water Marketing: The Next Generation. Rowman and Littlefield. Bemrose, R., L. Kemp, M. Henry, and F. Soulard (2009). The Water Yield

for Canada as a Thirty-year Average (1971 to 2000): Concepts, Methodology and Initial Results. Catalogue No. 16-001-M No. 7. Statistics Canada. <http://www.statcan.gc.ca/ pub/16-001-m/16-001-m2009007eng.pdf>, as of December 1, 2009. Bill C-26, An Act to amend the International Boundary Waters Treaty Act and the International River Improvements Act, 3rd Sess., 40th Parl., 2010. <http://www2.parl.gc. ca/HousePublications/Publication. aspx?Docid=4528706&file=4>, as of August 2, 2010. Canada (2010). The Transboundary Waters Protection Act: Bill Summary. Government of Canada. <http://www.canadainternational. gc.ca/can-am/bilat_can/bill-loi. aspx?lang=eng>, as of July 29, 2010. El Ayoubi, Farah, and James D. McNiven (2006). Political, Environmental and Business Aspects of Bulk Water Exports: A Canadian Perspective. Canadian Journal of Administrative Sciences 23, 1 (March). <http:// www3.interscience.wiley.com/jou rnal/121479332/issue>, as of May 25, 2010. Environment Canada (2004). Threats to Water Availability in Canada. NWRI Scientific Assessment Report Series No. 3 and ACSD Science Assessment Series No. 1. National Water Research Institute. <http:// www.ec.gc.ca/inre-nwri/default. asp?lang=En&n=0CD66675-1& offset=1&toc=show>, as of June 1, 2010. Environment Canada (2006). A Primer on Fresh Water: Questions and Answers. Government of Canada. <http://www.ec.gc.ca/eau-water/ 25F6C7A2-91FC-4B2DADE3-ED FFB7933F7D/e_primer.pdf>, as of June 1, 2010. Environment Canada (2009a). Prohibition of Bulk Water Removal for the Purpose of Water Export. Web page. Government of Canada. <http:// w w w.ec.gc.ca/eauwater/default.

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asp?lang=En&n=1356EC91-1>, as of June 3, 2010. Environment Canada (2009b). Wise Water Use. Government of Canada. <http://www.ec.gc.ca/eau-water/ default.asp?lang=En&n=F25C70 EC-1>, as of June 2, 2010. Environment Canada (2009c). How Much Do We Have? Web page. Government of Canada. <http:// www.ec.gc.ca/eau-water/default. asp?lang=En&n=51E3DE0C-1>, as of June 2, 2010. Hunaidi, Osama (2000). Detecting Leaks in Water Distribution Pipes. Construction Technology Update No. 40. Institute for Research in Construction, National Research Council Canada. <http://www.nrccnrc.gc.ca/obj/irc/doc/ctu-n40_eng. pdf>, as of June 1, 2010. International Joint Commission (2000). Protection of the Waters of the Great Lakes. International Joint Commission. Johansen, David (2008). Bulk Water Removals: Canadian Legislation. Library of Parliament Background Paper. Library of Parliament. <http:// www2.parl.gc.ca/Content/LOP/Re searchPublications/prb0213-e.pdf>, as of June 2, 2010. Katz, Diane (2010). Making Waves: Examining the Case for Sustainable Water Exports from Canada. Fraser Institute. Nanos, Nik (2009). Canadians Overwhelmingly Choose Water as Our Most Important Natural Resource. Policy Options (July-August): 12–15. <http://www.irpp.org/po/archive/ jul09/nanos.pdf>, as of March 26, 2010. Soulard, François, and Mark Henry (2009). Measuring Renewable Water Assets in Canada: Initial Results and Research Agenda. EnviroStats 3, 2 (Summer). Statistics Canada. <http://www.statcan.gc.ca/pub/16002-x/16-002-x2009002-eng.pdf>, as of June 1, 2010. 

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Wikimedia Commons

Squandered gains Finance Minister Flaherty’s claim that stimulus spending is behind Canada’s economic resilience misses the truth Niels Veldhuis and Jason Clemens

C

anada’s government has taken impressive steps to get its financial house in order while exercising responsible economic stewardship. Unfortunately, it hasn’t done so recently. We were surprised to read a recent Wall Street Journal interview in which Finance Minister Jim Flaherty attributed Canada’s economic resilience in the face of the recession to his government’s stimulus actions (O’Grady, 2010, June 26). The truth is that Canada’s economic performance has benefited from the sound reforms implemented in the mid-1990s by both provincial and federal governments.1 By improving Canada’s fiscal fundamentals, previous governments established the foundation for our current economic performance and our ability to weather the recessionary storms. It was the federal Liberals under Jean Chrétien and Paul Martin who, after one false start, brought real reform to federal finances with their 1995 budget.2 In that year, they proposed cutting program spending by almost 9% over just two years. These were not reductions in spending growth; these were actual reductions in spending.

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The federal government then outperformed its goal and reduced spending by 9.7%, cutting the size of the federal government relative to the economy from 16% to 13.3%. Unlike the current government, the Liberals did not protect or insulate any spending from review. Transfers to the provinces were reduced, business subsidies and spending on transportation were slashed, military spending was cut, and even Employment Insurance spending was reduced through reforms. The Liberals also reformed their spending to get more from less. The combination of spending reductions, an improving economy (which was not a coincidence), and falling interest rates resulted in the first balanced budget in more than two generations in just three years. The government followed this historic achievement with a series of budgets that reduced personal and business taxes in a way that promoted economic growth by encouraging, rather than discouraging, the things Canada needs more of, such as investment, savings, and entrepreneurship.

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Canada’s economic performance has benefited from the sound reforms implemented in the mid-1990s by both provincial and federal governments.

Alongside the federal reforms, many provincial governments also cut and reformed spending. Indeed, the provincial experience demonstrates the non-ideological nature of the 1990s reforms. The first major breakthrough after almost two generations of fiscal irresponsibility came from the NDP in Saskatchewan, followed closely by the Conservatives in Alberta and then the federal Liberals. Indeed, the achievement encompassed the entire Canadian political class. This “redemptive decade” (as we have called it in our recent book The Canadian Century) saw a variety of other important reforms as well, most notably to the Canada Pension Plan and provincial welfare programs. Cutting government spending, lowering and simplifying taxes, and paying down debt unleashed a burst of prosperity and confidence that gave people and their elected representatives the courage and fortitude to tackle more difficult problems. Regrettably, we now seem to be encountering a nonpartisan rush to squander these hard-won gains. Provincial governments of every political stripe are plunging back into the vicious circle of rising deficits and debt, higher interest costs and taxes, and slower economic growth, pushing deficits still higher. The current federal government is certainly not the only guilty party in Canada, never mind other parts of North America and the rest of the industrialized world. In most years since 2000/2001, government spending growth has exceeded economic growth. For example, in the 2004/2005 federal budget, program spending increased by nearly 15%, over double the rate of economic growth (6.4%). Since assuming office in 2006, the Conservatives have not exactly been a bastion of conservative fiscal policy either. In 2005, the year before the Harper Conservatives were first elected, program spending amounted to $175.2 billion. Prior to the recession, the government had already raised spending by more than 18% over just three years to $207.9 billion. Worse still, according to the latest budget, program spending will reach $249.2 billion this fiscal year. Not surprisingly, this large increase in spending has been financed by a large deficit of almost $50 billion. The 2010 budget showed deficits declining sharply and spending growing far more slowly in the future

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(Canada, Department of Finance, 2009, 2010). The Progressive Conservative government followed a similar approach in the 1980s. Rather than make difficult but necessary decisions today, the government assumed better times tomorrow. There is no doubt that Canada weathered the recession better than many other countries, including our most important ally and trading partner, the United States. But we did so because many of the fundamentals were better here, from banking to federal and provincial finances. Canada now needs to relearn the lessons of the 1990s.

Notes 1 For a detailed analysis of government stimulus spending in Canada, see Karabegović et al. (2010). 2 Other than that specifically referenced, the data and information contained in this article are from Crowley et al. (2010).

References Canada, Department of Finance (2009). Fiscal Reference Tables (October 2009). Government of Canada. <http://www. fin.gc.ca/frt-trf/2009/frt09_e.pdf>. Canada, Department of Finance (2010). Budget 2010: Leading the Way on Jobs and Growth. Government of Canada. <http://www.budget.gc.ca/2010/pdf/budget-planbudget aire-eng.pdf>. Crowley, Brian Lee, Jason Clemens, and Niels Veldhuis (2010). The Canadian Century: Moving Out of America’s Shadows. Key Porter Books. Karabegović, Amela, Charles Lammam, and Niels Veldhuis (2010). Did Government Stimulus Fuel Economic Growth in Canada? An Analysis of Statistics Canada Data. Fraser Alert. Fraser Institute. O’Grady, Mary Anastasia (2010, June 26). Canada: Land of the Free. Wall Street Journal. 

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Forum Focus

LABOUR MARKETS

Creating a vibrant, dynamic labour market Amela K arabegović

T

here is undoubtedly much to celebrate this Labour Day. While the past two years have been tough for many Canadian workers, the news this year has been a cause for optimism. For example, employment has grown in nearly every month this year, and nearly 300,000 jobs were created in the first half of 2010 (January to July)—close to the total number of jobs lost during the recent economic downturn.1, 2 In addition, the unemployment rate declined during the first half of 2010, down from 8.7% at the height of the recession to 8.0% in July. While these trends are certainly positive, Canada’s labour market could be much more vibrant. Current labour policies in many provinces and at the federal level are biased and overly prescriptive, diminishing the flexibility of the labour market (Karabegović et al., 2009). Provincial governments are still increasing minimum wages, thereby reducing opportunities for young and low-skilled Canadians (Godin and Veldhuis, 2009). Our overly generous employment insurance (EI) system keeps unemployment rates higher and spells of unemployment longer than they ought to be (Veldhuis and Karabegović, 2009; Veldhuis and Lammam, 2009, Nov. 24; Riddell et al., 2006). Let’s use this Labour Day to remind our governments of the importance of creating a dynamic, well-functioning

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labour market that can successfully respond to everchanging economic conditions. Most critically, Canada lacks labour market flexibility—the ease with which workers and employers can reallocate their resources to respond to changes in market conditions.3 Labour market flexibility is important because it reduces the cost and duration of the reallocation process that ultimately leads to higher job growth and a lower unemployment rate.4 Policy makers could improve labour market flexibility specifically, and the performance of Canada’s labour markets generally, by pursuing more balanced and less prescriptive labour laws. A recent study published by the Fraser Institute evaluated labour relations laws in the private sector for the Canadian provinces and US states based on whether these laws facilitated flexibility and choice by balancing the needs of employers and employees (Karabegović et al., 2009).5 The authors found that the Canadian provinces performed poorly in comparison to their American counterparts. Specifically, the provinces occupied the bottom 10 positions in the rankings (51st to 60th). “Successor rights provisions” in labour relations laws are a good example of how such laws affect individual

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Fotolia, iStockphoto

firms and overall labour market performance. Successor rights provisions determine whether and how collective bargaining agreements survive the sale, transfer, consolidation, or other disposal of a business. If a business or a portion of a business is rendered uneconomical as a result of changes in the market, reductions in competitiveness, or other reasons, stringent successor laws will impede the reorganization of the business and the efficient reallocation of its capital. Laws in every Canadian province, as well as laws governing federal workers, make an existing collective agreement binding upon a new employer whenever a business—in whole or in part—is sold, transferred, leased, merged, or otherwise disposed of (Karabegović et al., 2009). Moreover, successor rights in Canada apply even to changes of ownership due to bankruptcy (Karabegović et al., 2009). Needless to say, successor rights impede and frustrate the restructuring process, making it harder for firms to respond to changes in economic conditions, and can lead to idle labour and capital. Recent changes to Canada’s EI system are another example of well-intentioned but ultimately misguided labour policy. Over the past two years, Canada’s EI system

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has become more generous (Veldhuis and Karabegović, 2009; Veldhuis and Lammam, 2009, Nov. 24). If the past is any guide, a more generous EI program will lead to a permanent increase in unemployment rates and longer spells of unemployment (Riddell et al., 2006). A similarly well-intentioned but harmful policy is minimum wage increases. In 2010, seven of the 10 provinces increased or plan to increase their minimum wages (HRSDC, 2010). In addition, seven of the 10 provinces have set minimum wages as a percentage of GDP per worker (a measure that accounts for the ability of employers to pay wages) that are among the 10 highest in North America (Karabegović et al., 2010). Employers respond to minimum wage increases by reducing the number of workers they employ and/or the number of hours their employees work. In other words, minimum wage increases result in higher unemployment for low-skilled workers and young people, who make up the vast majority of minimum wage workers. This unpleasant reality is well documented. For example, a recent, comprehensive study reviewed more than 100 studies covering 20 countries over the past 15 years and found that the “overwhelming majority” of

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Forum Focus

LABOUR MARKETS

studies, especially the most credible, consistently showed that minimum wage increases result in decreases in employment (Neumark and Wascher, 2007). It should come as no surprise, therefore, that while the overall unemployment rate in Canada was 8.0% in July, unemployment for those aged 15 to 24 is almost double at 14.1%. Thanks in part to high and increasing provincial minimum wages, about one in seven young Canadians who want to work cannot find a job. While there are reasons to celebrate this Labour Day, let’s not be complacent about our labour market performance. Canadian provinces and the federal government maintain many policies that limit the dynamism and success of our labour markets. This Labour Day, let’s focus on creating a vibrant and flexible labour market.

5 Three areas of labour relations laws were examined: union certification and decertification, union security, and regulation of unionized firms (see Karabegović et al., 2009).

References Godin, Keith, and Niels Veldhuis (2009). The Economic Effects of Increasing British Columbia’s Minimum Wage. Studies in Labour Markets. Fraser Institute. Human Resources and Skills Development Canada [HRSDC] (2010). Hourly Minimum Wages in Canada for Adult Workers. Government of Canada. <http://srv116.services. gc.ca/dimt-wid/sm-mw/rpt2.aspx?dec=5>, as of August 4, 2010. Karabegović, Amela, Alex Gainer, Milagros Palacios, and Niels Veldhuis (2010). Measuring Labour Markets in Canada and the United States: 2010 Edition. Studies in Labour Markets. Fraser Institute. Karabegović, Amela, Alex Gainer, and Niels Veldhuis (2009). Labour Relations Laws in Canada and the United States: An Empirical Comparison (2009 Edition). Fraser Institute. Karabegović, Amela, and Niels Veldhuis (2010). The “Great Recession”? Fraser Forum (May): 12–16.

Fotolia,

Neumark, David, and William Wascher (2007). Minimum Wages and Employment. Foundations and Trends in Microeconomics 3, 1–2: 1–182. Riddell, Chris, Peter Kuhn, Jason Clemens, and Milagros Palacios (2006). Long-Term Effects of Generous Unemployment Insurance: Historical Study of New Brunswick and Maine, 1940-1990. Fraser Alert. Fraser Institute.

Notes 1 The data from Statistics Canada show employment losses of 9,300 jobs in July, but these numbers are not indicative of the labour market performance in the first half of 2010. 2 The data used in this article are from Statistics Canada (2010a) and (2010b) unless otherwise noted. 3 For example, Canadian provincial and federal labour relations laws are significantly more biased and prescriptive than US laws, resulting in a lower level of labour market flexibility. For details, see Karabegović et al. (2009). 4 For a summary of the literature on the impact of labour market flexibility on labour market performance, see Karabegović et al. (2010).

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Statistics Canada (2010a). Labour Force Historical Review 2009. Catalogue No. 71F0004XVB. CD-ROM. Statistics Canada. Statistics Canada (2010b). Releases from the Labour Force Survey. The Daily (January–July). <http://www.statcan.gc.ca/ subjects-sujets/labour-travail/lfs-epa/lfs-epa-eng.htm>. Veldhuis, Niels, and Amela Karabegović (2009). An Insurance Proposal that Doesn’t Work. Fraser Forum (September): 14–15. Veldhuis, Niels, and Charles Lammam (2009, November 24). Are the Recent Changes to Canada’s Employment Insurance Rules a Good Way to Reform the Program? No. Business in Vancouver: 35. 

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Right-towork laws and economic growth Richard Vedder

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he American and Canadian systems of government provide a great benefit to students of public policy: they create natural experiments by which differences in policies across various states and provinces can be evaluated. A vast amount of research has shown that jurisdictions with lower taxes, for example, typically perform better economically than those with higher taxes (Clemens, 2008). In the United States, a provision in the basic labour law, the National Labor Relations Act of 1935 as amended in 1947, gives individual states a choice of two options regarding worker contracts with their employers. Twenty-eight states, including all of the states in the relatively populous Northeast and industrial Midwest, require workers either to pay full union dues or, if they choose, to pay only the portion of dues directly related to representation costs such as bargaining and maintaining the collective agreement. A second group of 22 states, however, concentrated mostly in the American South and the West, have what are known as “right-to-work” (RTW) laws. (These laws are known as “worker choice” laws in Canada.) Such laws ensure that employee hiring and retention cannot be conditional upon membership in a labour union or on union dues payment. That is, workers in the 22 RTW states have full discretion with respect to the payment of any union dues. Partly as a consequence of this, unionization rates (union membership plus non-members covered by the collective agreement) are dramatically higher in the non-RTW states.1 Two important questions to consider are: can we draw any conclusions regarding American

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attitudes towards the nature of their terms of employment from this difference in unionization rates? And do RTW laws have a significant impact on economic growth and/or quality of life? The answer to both questions is an unambiguous “yes.”

The migration evidence American attitudes toward RTW laws are at least partially reflected in the migration data between RTW and nonRTW states. There has been enormous migration from non-RTW jurisdictions to RTW states (Vedder, 2010). From 2000 to 2009, some five million Americans moved from the 28 non-RTW states to the 22 RTW states (Vedder, 2010). On average, every single minute, day and night, for these nine years a person moved into a RTW state (Vedder, 2010). The typical RTW state gained well over 200,000 new residents. Why do so many people migrate to RTW states? Sure, some of the RTW states have other characteristics—such as low taxes or a favourable climate—that might be the true cause of the movement. To capture these non-RTW characteristics, my paper “Right-to-Work Laws: Liberty, Prosperity, and Quality of Life,” recently published in the peer-reviewed Cato Journal, used more elaborate statistical procedures (multiple regression analysis) (Vedder, 2010). Even after controlling for these factors, I observed a statistically significant relationship between migration and the presence of right-to-work laws. The bottom line is that Americans flatly prefer a legal environment where

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the sale of their labour services is not constrained by laws requiring union dues payment.

Why did they move? Right-to-work laws and economic growth While most people prefer freedom to constraints, it is difficult to believe that the requirement of union dues payment alone would cause people to move. Is it possible that RTW laws have other positive economic effects that contribute to greater job opportunities and economic growth? Here again, the answer is clear. The evidence suggests the following with respect to RTW states (Vedder, 2010): ■ Typically, a larger proportion of adults work in these states; ■ Unemployment rates are, on average, somewhat lower; ■ Growth in average income (i.e., GDP per capita) over time is greater; and, ■ Investment in capital grows faster. The reasons for these trends relate to costs. If a worker is forced to pay union dues as a condition of employment, most will, perhaps reluctantly, do so, but a few will chose not to, for reasons of principle or because the union dues at the margin reduce the take home pay of the job below what is acceptable. This leads to a reduction (albeit a modest one) in the labour supply. More importantly, however, where collective bargaining contracts are

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commonplace, the cost of hiring and firing workers is greater for employers, reducing labour demand and thus resulting in a higher unemployment rate (Vedder, 2010). States such as Michigan and Ohio, which do not have RTW laws, have higher unemployment rates because unionization has priced workers out of the market. High costs associated with fringe benefit packages, including retirement and health care, contributed to the bankruptcy of such icons as General Motors and Chrysler (Vedder, 2010). For a time, companies like these lost money on each additional worker hired because their marginal contribution to output was less than their marginal cost to the company. This, in turn, led to lower returns on capital investments, which caused capital to flee these jurisdictions. For example, in 1994, 42 of the Fortune 500 largest corporations were headquartered in Ohio; now this state has only 23 of these companies and loses more than one per year, typically to RTW states like Texas (which went from 37 to 57) and North Carolina (which went from 8 to 16) (Fortune Magazine, 1994, Apr. 18; 2010, May 3).2 How much of an economic impact has all of this had on living standards? To answer this question, I used direct statistical estimation using regression analysis. For example, take two states with $24,000 per capita income in 1977 (in 2007 dollars)—one a RTW state, the other a non-RTW state. My modeling suggests that per capita incomes typically would have risen to about $36,000 in the non-RTW state and to $38,760 in the RTW states. That is a difference of $2,760 a person, or over $11,000 for a family of four (Vedder, 2010). Is it any wonder that people have voted with their feet and have moved to RTW states? In Canada, workers can be forced to join and financially support unions with full dues payment as a condition of employment. Canadians do not enjoy the types of freedoms that workers enjoy in the 22 American RTW states. Since labour legislation is a matter of provincial jurisdiction, my analysis shows that if provinces want to attract workers, lower unemployment, increase incomes, and attract more capital, they should move towards implementing a right-to-work law.

Notes 1 In 2009, RTW states had an average unionization rate of 8.0%, less than half of that of non-RTW states (16.5%) (Hirsch

continued on page 17

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The power of worker choice laws A new direction for Alberta’s labour policy Alex Gainer and Amela K arabegović

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hen it comes to providing the most competitive economic environment in Canada, Alberta has historically been the leader. Alberta was the first province to pay off its public debt (in 2004/2005), the first to reform its welfare system, the first (and still the only) province to implement a flatrate personal income tax, the first to completely eliminate its disastrous corporate capital tax, and the first to aggressively decrease corporate income taxes (Alberta, 2010; Schafer et al., 2001; Alberta, Department of Finance, 2001; Clemens et al., 2006). It was also the first province to consider significantly reforming its labour laws. In 1995, the Alberta government contemplated worker choice legislation (known as “rightto-work” legislation in the United States) (AEDA, 1995). Unfortunately, the government came to the wrong decision, based on erroneous conclusions and without considering the full body of empirical evidence, and did not go through with the reforms. But with Labour Day just around the corner, perhaps it is time for the province to reconsider its decision.

The economic impact of worker choice laws Current labour laws in Alberta allow the inclusion of mandatory union membership clauses in collective agreements. This means that workers who are joining unionized firms have to become union members as a

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condition of employment if their collective agreement has a mandatory union membership clause (Alberta Labour Relations Board, n.d.).1 In contrast, worker choice laws prohibit mandatory union membership clauses and union dues payments; instead, these laws give employees the right to decide whether or not to join or financially support a union. Several studies have examined the economic impact of worker choice laws. These laws affect economic outcomes primarily through a reduction in unionization rates. That is, when workers are given a choice with respect to union membership and dues payment, they choose unions less often. Evidence from the US shows that worker choice laws reduce unionization by 3% to 8% (Moore, 1998). High unionization rates reduce competitiveness and investment to the detriment of the economy and labour market performance (Holcombe and Gwartney, 2010). A study by Professor William Moore (1998), which reviewed the literature on worker choice laws, found that firms consider worker choice laws in the US in their location

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decisions and that worker choice laws promote better business climates, leading to higher levels of industrial development. Paul Kersey, in a study titled The Economic Effects of Right-to-Work Laws: 2007, found that between 2001 and 2006, the economies of the US states with worker choice laws grew by 3.4% on average, compared to 2.6% in non-worker choice states (Kersey, 2007). Moreover, jobs grew by 1.2% annually in worker choice states, while jobs in non-worker choice states grew by only 0.6% over the same period. Most recently, Professor Richard Vedder examined state migration rates in the United States in the context of worker choice legislation (see article on page 13 in this issue of Fraser Forum). From 1970 to 2008, the number of people living in worker choice states more than doubled, compared to a 26% increase in population in states without such laws. Professor Vedder found that there has been significant migration from states that do not have worker choice laws to those that do. He also examined the growth rates of US states from 1977 to 2007 and found that worker choice laws lead to higher economic growth rates, even after controlling for a number of other factors such as tax burdens, levels of education, amount of land area, and population growth. Finally, a more narrow study by Abraham and Voos (2000) examined the economic impact of worker choice laws by looking at changes in stock prices in Louisiana and Idaho; these states implemented worker choice laws in 1976 and 1986, respectively. The authors found that stock prices in these two states rose significantly after worker choice laws were introduced.

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Alberta’s worker choice laws study In 1995, the Alberta government asked the Alberta Economic and Development Agency (AEDA) to conduct a study on the economic benefits of worker choice laws for Alberta. Unfortunately, and despite contrary empirical evidence, the AEDA study concluded that worker choice laws would not produce economic benefits for Albertans (AEDA, 1995) and was, in large part, why worker choice legislation was not implemented in Alberta. According to the Fraser Institute’s detailed critique of the AEDA study, published in 1997, “the AEDA’s conclusions were misguided” (Mihlar, 1997: 215). For example, the AEDA study argued that worker choice legislation “in and of itself does not create a competitive advantage nor would it cure a competitive disadvantage” (AEDA, 1995: 34). The Institute’s critique showed that this conclusion ignored the empirical studies that demonstrate that worker choice laws improve business climates and, ultimately, economic outcomes. For instance, a study by Professor Thomas Holmes (1995) found that there was a decrease in manufacturing activity (a sector that is highly unionized) when going from a worker choice state into a neighbouring non-worker choice state. The AEDA study also argued that worker choice laws do not affect the incidence of strikes and lockouts among employees and employers. Again, the Institute’s critique, citing evidence from a study by Professors Bird and Davies (1995), found that worker choice laws have significantly reduced the level and scope

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of lockouts and strikes in the United Kingdom. Finally, the AEDA study claimed that unions raise, rather than reduce, productivity. The Fraser Institute’s critique discredited this conclusion by providing empirical evidence that unions reduce productivity. For instance, Long (1993) showed that unionized firms grew 3.7% slower in the manufacturing sector and 3.9% slower in the non-manufacturing sector than non-unionized firms.

Conclusion The empirical evidence on worker choice laws is clear. Jurisdictions that adopt these laws benefit from stronger economies and better labour market performance. Alberta’s decision not to implement worker choice legislation back in 1995 was based on flawed conclusions and did not take into account the full body of empirical evidence. It is time for Alberta to reconsider worker choice laws and become the leader in Canada in adopting policies that foster a thriving economy.

Note 1 Alberta’s labour laws also require employers to deduct union dues and provide them to unions when they receive a written authorization from employees.

References Abraham, Steven E., and Paula B. Voos (2000). Right-to-Work Laws: New Evidence from the Stock Market. Southern Economic Journal 67, 2: 345–62. Alberta (2010). Budget 2010: Fiscal Plan – Tables. Government of Alberta.

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<http://budget2010.alberta.ca/details/index.html>. Alberta, Department of Finance (2001). Alberta Budget 2001. Government of Alberta. Alberta Economic Development Authority [AEDA] (1995). Joint Review Committee: Right-to-Work Study. AEDA. Alberta Labour Relations Board (n.d.). Labour Relations Code. Government of Alberta. <http://www.alrb. gov.ab.ca/ALRB_Code.htm>. Bird, Cerek, and Jackie Davies (1995). Employment Gazette. Statistical Services Division, Employment Division, United Kingdom. Clemens, Jason, Milagros Palacios, Todd Gabel, and Niels Veldhuis (2006). Canadian Provincial Investment Climate Report: 2006 Edition. Fraser Institute. Holcombe, Randall G., and James D. Gwartney (2010). Unions, Economic Freedom, and Growth. Cato Journal 30, 1 (Winter): 1–22. Holmes, Thomas J. (1995). The Effects of State Policies on the Location of Industry: Evidence From State Borders. Research Department Staff Report No. 205 (December). Federal Reserve Bank of Minneapolis. Karabegović, Amela, Alex Gainer, and Niels Veldhuis (2009). Labour Relations Laws in Canada and the United States: An Empirical Comparison (2009 Edition). Studies in Labour Markets. Fraser Institute. Karabegović, Amela, Alex Gainer, Milagros Palacios, and Niels Veldhuis (2010). Measuring Labour Markets in Canada and the United States: 2010 Edition. Studies in Labour Markets. Fraser Institute. Kersey, Paul (2007). The Economic Effects of Right-to-Work Laws: 2007. Mackinac Center for Public Policy.

KPMG Management Consulting (1995). A Comparison of Business Costs in Canada and the United States. Government of Canada, Department of Foreign Affairs and International Trade.

Moore, William J. (1998). The Determinants and Effects of Right-toWork Laws: A Review of the Recent Literature. Journal of Labor Research 19, 3 (Summer): 445–69.

Long, Richard J. (1993). The Effect of Unionization on Employment Growth of Canadian Companies. Industrial and Labour Relations Review 46, 4 (July): 691–703.

Schafer, Chris, Joel Emes, and Jason Clemens (2001). Surveying US and Canadian Welfare Reform. Critical Issues Bulletin. Fraser Institute. <http://www.fraserinstitute.org/ publicationdisplay.aspx?id=13457>.

Mihlar, Fazil (ed.) (1997). Unions and Right-to-Work Laws: The Global Evidence of Their Impact on Employment. Fraser Institute.

Vedder, Richard (2010). Right-to-Work Laws: Liberty, Prosperity, and Quality of Life. Cato Journal 30, 1 (Winter): 171–80. 

Right-to-work laws and economic growth continued from page 14 and Macpherson, 2010). For a literature review of the impact of unionization on economic growth and productivity, see Palacios et al. (2009). 2 RTW laws, of course, are likely one of many reasons why Fortune 500 companies are moving to RTW states.

References Clemens, Jason (ed.) (2008). The Impact and Cost of Taxation in Canada: The Case for Flat Tax Reform. Fraser Institute. Fortune Magazine (1994, April 18). The Fortune 500: The Largest US Industrial Corporations. Fortune Magazine: 302–03. Fortune Magazine (2010, May 3). America’s Largest Corporations. Fortune Magazine: F-46. Hirsch, Barry T., and David Macpherson (2010). Union Membership and Coverage Database from the CPS. Web page. <http://www.unionstats.com/>, as of June 30, 2010. Palacios, Milagros, Alex Gainer, Amela Karabegović, and Niels Veldhuis (2009). Measuring Labour Markets in Canada and the United States (2009 Edition). Fraser Institute. Vedder, Richard (2010). Right-to-Work Laws: Liberty, Prosperity, and Quality of Life. Cato Journal 30, 1 (Winter): 171–80. 

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Should more cities implement living wage policies? Niels Veldhuis and Amela K arabegović

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n April, the City of New Westminster became the first Canadian city to adopt a “living wage” policy (City of New Westminster, 2010a, 2010b, 2010c). A living wage is a minimum hourly wage that must be paid to all city employees and the employees of businesses that contract with the city to provide services. New Westminster’s living wage is set at over $18 per hour for 2010, more than double British Columbia’s current $8 per hour minimum wage (City of New Westminster, 2010c; Richards et al., 2010; HRSDC, 2009). The wage is said to be pegged to the level at which a household can “meet its basic needs” (Richards et al., 2010: 2). However, according to research done by Chris Sarlo, a professor of economics at Nipissing University, New Westminster’s living wage is significantly above what is necessary for a “basic needs” standard of living—the level of income needed to meet such basic needs as a nutritious diet, satisfactory housing, clothing, health care, public transportation, household insurance, telephone service, and a host of other items (Sarlo, 2008). Advocates of living wages argue that these artificially imposed wage levels are one of the most powerful tools available to reduce poverty. However, evidence from the United States proves differently. In fact, the imposition of living wages reduces job opportunities for the very families that they are intended

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to help. When wages are legislated by the government above levels that would prevail in a competitive market, employers respond by reducing the number of workers they employ and/or the number of hours their employees work. This means that living wage laws lead to higher unemployment for low-skilled workers and reduce opportunities for many workforce entrants to gain valuable skills and work experience. These effects have been well documented in the United States where about 140 municipalities have implemented living wages over the past two decades (Neumark and Wascher, 2008). Professor David Neumark of the University of California, Irvine, and Dr. William Wascher of the US Federal Reserve recently reviewed the real-world impact of living wage laws in the United States. They concluded that living wage laws result in reductions in private sector employment. Specifically, a 10% increase in the living wage reduces job opportunities by nearly 2% (Neumark and Wascher, 2008). These findings are further corroborated by evidence on the impact of living wage laws on hiring decisions. For instance, a recent study in the Southern Economic Journal examined the impact of the Los Angeles living wage policy on firms’ hiring practices (Fairris and Bujanda, 2008). The authors found that the workers who were hired after the living wage policy came into effect had more prior formal training than those who were hired before the policy came into effect. Put differently, living wage policies are particularly harmful to low-skilled workers since employers respond by hiring more qualified workers to compensate for the wage increases (Fairris and Bujanda, 2008). Another negative impact of living wage policies is that employers often respond to legislated wage increases by reducing fringe benefits and on-the-job training (Godin and Veldhuis, 2009). Even if workers are lucky enough to keep their jobs and the same number of hours after a living wage is implemented, they may not be better off if benefits and/or training are reduced. Since higher labour costs faced by contractors are, in part, passed on to cities, living wages can also have a significant impact on municipal budgets and thus property taxes, property values, and local development. Increased property taxes lead to increased rents, which especially hurt low-income families. As the City of New Westminster has put it, “historically, the purchasing of goods and services undertaken by City staff has been based on ‘best value’ to the City” (City

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City of New Westminster (2010b). Regular Meeting of City Council, April 26, 2010: Minutes. <http://www.newwest city.ca/council_minutes/0426_10/ Regular_2010_Apr_26_Minutes.pdf>.

iStockphoto

City of New Westminster (2010c). Report: Finance & Information Technology and Human Resources: Living Wage. <http://www.newwestcity.ca/ council_minutes/0426_10/CW%20 Living%20Wage.PDF>.

of New Westminster, 2010c: 3). But with the new living wage policy, businesses that contract with the city must first prove that they pay their employees the living wage. When the wages of the employees of private contractors are forced up to the wages received by unionized municipal workers, the city has less incentive to use private sector services. As a result, more activities will be done by the city instead of the private sector. This is unfortunate, given the benefits of outsourcing. A comprehensive academic survey of studies on contracting out in public sectors in North America, Europe, Asia, and Oceania found that competitive tendering and contracting usually leads to substantial cost savings, in the order of 20% (Domberger and Rimmer, 1994). Moreover, private sector services have been found to be superior to their public counterparts (Domberger et al., 1995). Living wages are not the answer to the hardships experienced by many poor families. Rather than reduce poverty, living wage laws rob low-skilled workers of the opportunity to participate in the labour market. As a result, living wage laws hurt the very people they are intended to help, especially when the economy slows and many of them are trying to find employment.

References City of New Westminster (2010a). Council in Committee of the Whole, April 26, 2010: Minutes. <http://www.newwestcity. ca/council_minutes/0426_10/CW_2010_Apr_26_Min utes.pdf>.

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Domberger, Simon, Christine Hall, and Eric Ah Lik Li (1995). The Determinants of Price and Quality in Competitively Tendered Contracts. Economic Journal 105, 433 (November): 1454–70.

Domberger, Simon, and Stephen Rimmer (1994). Competitive Tendering and Contracting in the Public Sector: A Survey. International Journal of the Economics of Business 1, 3: 439–53. Fairris, David, and Leon Frenandez Bujanda (2008). The Dissipation of Minimum Wage Gains for Workers through Labor-Labor Substitution: Evidence from the Los Angeles Living Wage Ordinance. Southern Economic Journal 75, 2: 473–96. Godin, Keith, and Niels Veldhuis (2009). The Economic Effects of Increasing British Columbia’s Minimum Wage. Studies in Labour Markets. Fraser Institute. Human Resources and Skills Development Canada [HRSDC] (2009). Current and Forthcoming Minimum Hourly Wage Rates for Experienced Adult Workers in Canada. Government of Canada. <http://srv116.services.gc.ca/dimt-wid/ sm-mw/rpt1.aspx?lang=eng>. Last updated on March 19, 2009. Neumark, David, and William L. Wascher (2008). Minimum Wages. Massachusetts Institute of Technology. Richards, Tim, Marcy Cohen, and Seth Klein (2010). Working for a Living Wage: 2010 Update. Canadian Centre for Policy Alternatives. <http://www.policyalternatives.ca/ livingwage2010>. Sarlo, Chris (2008). What is Poverty? Providing Clarity for Canada. Fraser Institute. <http://www.fraserinstitute.org/ publicationdisplay.aspx?id=13597>. 

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m r o f g n o l e h T o o t s i s censu ve i s u r t in Niels Veldhuis and Charles Lammam

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cademics, economists, and other social scientists across the country are up in arms about the Conservative government’s recent decision to replace the mandatory long-form census with a new voluntary survey (see Gardner, 2010, July 18). Since these groups are heavy users of the long-form data, their widespread opposition to the government’s decision is not surprising. Canadians, however, would be wise to challenge the prevailing wisdom of these vested interest groups. After all, most of these same elites recently came to another ill-formed consensus: that massive government stimulus was needed to combat the recession. This occurred despite the overwhelming evidence that shows stimulus spending to be ineffective (see Veldhuis and Lammam, 2010a, 2010b). A sober second look at the mandatory long-form census is clearly needed. Any discussion about the Canadian census ought to begin with its original purpose. The main purpose of the first national census following Confederation in 1867 was to count the population to “determine appropriate representation by population in the new Parliament” (Statistics Canada, 2005). In other words, the federal government needed an estimate of the number of people in each region to apportion the seats in Parliament. To that end, the census was critical to our representative democracy. But today’s census goes well beyond simply asking how many people live at each household. The “short” census questionnaire, which is completed by 80% of all households, requires Canadians to answer questions about their location, gender, age, marital status, first language learned, and the relationships among those living in their household (Statistics Canada, 2006a). While some of these questions are justified, much of the

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information is already collected through other methods such as annual income tax returns, passports, driver’s licenses, social insurance numbers, and birth certificates. For instance, every year 90% of Canadians over 20 years of age complete income tax returns (Canada Revenue Agency, 2010: Table 4; Statistics Canada, 2009; calculations by authors). The long-form questionnaire, over which the debate is currently raging, is a truly intrusive instrument. Here the government forces Canadians to disclose a host of information about their private lives, such as what languages they speak on a regular basis; whether they are White, Chinese, South Asian, Black, Filipino, or a host of other ethnicities; where they work; how they get to work (i.e., bike, car, walk, taxi); what language they speak on the job; how much housework they do; how much time they spend playing with their kids or talking to their elders; whether or not they have any difficulty walking, climbing stairs, or bending; which member of the household pays the rent or mortgage; how many rooms their homes have (and how many are bedrooms); and whether or not their homes have any “missing or loose floor tiles,” “defective steps,” or more significant deficiencies like “defective plumbing” (Statistics Canada, 2006b). In total, the long-form census requires Canadians to complete 40 burdensome pages of intrusive personal questions. Canadians are forced to disclose this information without good cause. The census has simply become a cheap way for academics, economists, and social scientists to get information that would otherwise be acquired using market surveys of the kind that are routinely conducted on a voluntary basis. Suppose for a moment that no long-form census existed. On what merit would the academics argue that the government should force Canadians to disclose how much time they spend “bathing or playing with young children, driving children to sports activities, or helping them with homework”? Indeed, it would be truly interesting to see the reaction of the Canadian populace if the federal government was for the first time proposing that Canadians be forced to indicate whether they were “White,” “Black,” “Asian,” or “Arab.” While the mandatory long-form census is intrusive, some proponents of the census claim that Canadians need this information to hold governments to account. For instance, the CD Howe Institute recently noted that “Statistics Canada’s information—much of it based on the long-form census—is an essential tool for Canadians seeking to ensure that the state’s use of its vast powers is effective and benign” (Robson, 2010, July 13). However, it’s hard to see how revealing problems with defective plumbing and peeling paint will help keep the government in check.

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Of course, increased government accountability is critical. But in situations where governments intervene in the private lives of Canadians through its various and expansive programs (i.e., health care, education, welfare, etc.), a true test of effectiveness must be based on outcomes. For example, it is critical to determine whether governments deliver health care services to Canadians in a timely manner. In the past, however, governments have been unwilling to collect this sort of data. In fact, the lack of available data is what prompted the Fraser Institute to begin surveying Canadian doctors to determine how long Canadians wait for key medical services.1 In the field of education, governments have collected data on student performance for years through standardized tests. However, the data were not readily available for public consumption in an easy-to-digest manner. It was not until 1998, when the Fraser Institute started providing the information to parents on a school-by-school basis (see Cowley et al., 1998), that Canadians were able to judge the performance of government-run schools. While the current census data are no doubt interesting for academics, economists, and planners who wish to analyze social and economic trends, the long-form census is rife with intrusive questions that the government has no business forcing Canadians to answer.

Note 1 For the most recent results of the Fraser Institute’s Waiting Your Turn survey, please see Esmail (2009).

References Canada Revenue Agency (2010). Interim Statistics – Universe Data (2010 Edition). <http://www.cra-arc.gc.ca/gncy/stts/ gb08/pst/ntrm/menu-eng.html>. Cowley, Peter, Stephen Easton, and Michael Walker (1998). A Secondary Schools Report Card for British Columbia. Public Policy Sources No. 9. Fraser Institute. Esmail, Nadeem (2009). Waiting Your Turn: Hospital Waiting Lists in Canada (19th ed.). Fraser Institute. <http://www. fraserinstitute.org/publicationdisplay.aspx?id=13589&ter ms=waiting+your+turn>. Gardner, Dan (2010, July 18). Statisticians Go Wild. Ottawa Citizen. <http://www.ottawacitizen.com/sports/Statistic ians+wild/3284799/story.html>. Robson, William (2010, July 13). Good Information Comes at a Price. Globe and Mail. <http://www.theglobeandmail. com/news/opinions/good-information-comes-at-a-price/ article1637565/>. Statistics Canada (2005). History of the Census of Canada. Statistics Canada. <http://www12.statcan.ca/english/ census01/Info/history.cfm>. Statistics Canada (2006a). Census 2006 – 2A (Short Form). Statistics Canada. <http://www.statcan.gc.ca/imdb-bmdi/ instrument/3901_Q1_V3-eng.pdf>. Statistics Canada (2006b). Census 2006 – 2B (Long Form). Statistics Canada. <http://www.statcan.gc.ca/imdb-bmdi/ instrument/3901_Q2_V3-eng.pdf>. Statistics Canada (2009). CANSIM Table 051-0001: Estimates of Population, by Age Group and Sex for July 1, Canada, Provinces and Territories, Annual (persons unless otherwise noted). Statistics Canada. <http://cansim2.statcan.gc.ca/ cgi-win/cnsmcgi.exe?Lang= E&RootDir=CII/&ResultTe mplate=CII/CII_pick&Array_ Pick=1&ArrayId=051-0001>. Veldhuis, Niels, and Charles Lammam (2010a). The Stimulus Didn’t Work. Fraser Forum (May): 17–19. <http://www.fraserinstitute. org /re s e a rch-ne w s/re s e a rch / display.aspx?id=15847>. Veldhuis, Niels, and Charles Lammam (2010b). Research or Rhetoric? Fraser Forum (May): 20–23. <http://www.fraserinstitute.org/res earch-news/research/display.aspx?id= 15838>. 

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Social policy Hope Corman, Dhaval M. Dave, Nancy E. Reichman, and Dhiman Das (2010). Effects of Welfare Reform on Illicit Drug Use of Adult Women. NBER Working Paper No. 16072. National Bureau of Economic Research. The authors investigate the impact of welfare reform on illicit drug use among adult American women. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 is used as a cut-off point for determining when major welfare reform occurred in the United States. The 1996 legislation contained key reforms such as “time limits on the receipt of welfare, work requirements as a condition of receiving welfare, and stricter sanctions for non-compliance with program rules.” Using data on illicit drug use and drug treatment over the period of 1992 to 2002, the authors find that welfare reform led to decreased illicit drug use (measured by self-reported surveys, drug-related prison admissions, and drug arrests) and increased drug treatment among women who were at risk of relying on welfare. The behavioural change was likely a result of welfare reform altering the costs and benefits of using illicit drugs. For instance, the 1996 legislation linked cash assistance to work, made benefits time-limited, and enforced a tougher drug use policy for welfare recipients (for example, by denying benefits for life to women convicted of a drug felony). —Charles Lammam Hilary Williamson Hoynes and Diane Whitmore Schanzenbach (2010). Work Incentives and the Food Stamp Program. NBER Working Paper No. 16198. National Bureau of Economic Research. The study examines the effects of the United States’ Food Stamp Program (FSP) on recipients’ work incentives. The FSP is the largest social assistance program

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Fraser Forum September/October 2010

Big Stock Photo

Quarterly Research Alert in the US welfare system; it provides “benefits to buy food for families who are income and asset eligible.” In 2009, the program cost $50 billion and had 39 million recipients. The FSP is one of the few programs of its type that does not require its recipients to meet certain work conditions. Analyzing data over the period when the Food Stamp Program was introduced in various US counties (1968 to 1978), the study finds that the hours worked and employment rate of FSP recipients decreased after they started receiving food stamps. —Alex Gainer

Fiscal policy Markus Brückner and Anita Tuladhar (2010). Public Investment as a Fiscal Stimulus: Evidence from Japan’s Regional Spending During the 1990s. IMF Working Paper WP/10/110. International Monetary Fund. Japan experienced a “lost decade” in the 1990s as economic growth dropped sharply and persistently. Japanese governments responded by introducing several fiscal stimulus packages over the course of the decade. Using data on two types of stimulus spending—government investment (i.e., infrastructure) and government consumption (i.e., social assistance, public sector wages, business subsidies, etc.)—this study analyzes whether government stimulus actually stimulated the Japanese

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New studies, new ideas

economy between 1990 and 2000. The study finds that while the economic impact of government investment is larger than that of government consumption, both types of stimulus spending do not stimulate the economy. In econ-speak, the spending multiplier for government investment is larger than the multiplier for government consumption, but both multipliers are below one. The study also finds that the economic impact of government investment projects undertaken by local governments are larger than those undertaken by central governments. In trying to explain the generally weak economic impact of the Japanese government’s stimulus, the authors find evidence of “crowding-out” effects whereby government stimulus displaces private economic activity. They also find that over-investment by the government and a large pre-existing capital stock reduce the economic impact of government stimulus investment over time, since the productivity of additional units of public capital falls steadily. —Charles Lammam Harald Uhlig (2010). Understanding the Impact of Fiscal Policy – Some Fiscal Calculus. American Economic Review: Papers and Proceedings 100, 2: 30–24. The author examines the impact of government spending increases and tax cuts on gross domestic product (GDP). The types of government spending increases are similar to those contained in the American Recovery and Reinvestment Act of 2009, the legislation that authorized the US federal government’s fiscal stimulus package. The author finds that government spending initially has a positive impact on GDP but, over the long term (i.e., roughly 20 to 30 years), each dollar spent on government stimulus decreases GDP by $3.40. The author notes that this demonstrates that the effects of government stimulus spending can be misleading when examined only in the short term. On the other hand, the author finds that tax cuts are an effective way to stimulate economic

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activity since each dollar in tax cuts increases GDP by $2.40 over the long term. —Alex Gainer Carmen M. Reinhart and Kenneth S. Rogoff (2010). Growth in a Time of Debt. NBER Working Paper No. 15639. National Bureau of Economic Research. The authors study the relationship between government debt, economic growth, and inflation (i.e., increasing price levels) using data for 44 emerging and advanced countries over a 200-year period. The authors group the countries into four categories based on their public debt to GDP ratios: low debt (below 30%), medium debt (3060%), high debt (60-90%), and very high debt (above 90%). A main finding is that countries (both emerging and advanced) in higher debt categories generally experience lower rates of economic growth, and that countries with public debt over 90% of GDP experience the lowest rates of growth. In fact, the median growth rate in countries with public debt over 90% of GDP is roughly one percentage point lower than in countries with public debt levels below 90% of GDP. The authors also analyze the portion of public debt in emerging countries that is owed to foreign creditors (i.e., external debt). When external debt reaches 60% of GDP, annual growth in emerging countries declines by about two percentage points; for levels of external debt above 90% of GDP, growth rates are cut roughly in half. Finally, the authors do not find a relationship between public debt levels and inflation in the group of advanced countries. However, inflation is markedly higher in emerging countries with public debt levels above 90%. In those countries, the median inflation rate more than doubles as debt rises from the low range (0% to 30%) to the very high range (above 90%). —Milagros Palacios

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Tax policy François Gourio and Jianjun Miao (2010). Transitional Dynamics of Dividend and Capital Gains Tax Cuts. NBER Working Paper No. 16157. National Bureau of Economic Research. The authors analyze the economic effects of temporary and permanent cuts in dividend and capital gains tax rates. In particular, they analyze the effects of the 2003 dividend and capital gains tax cuts in the United States. The authors find that when such tax cuts are permanent, capital (i.e., machinery and equipment, inventories, land, etc.), investment, consumption, output, labour, and productivity increase permanently. Dividend payments and equity issuance increase permanently as well. By contrast, when the tax cuts are temporary (like the 2003 reforms), total investment falls and dividend payments increase during the period in which the tax cuts are implemented. The effects are reversed when the tax cuts expire. The authors also find that the effects of a temporary dividend tax cut are different from those of a temporary capital gains tax cut. A temporary capital gains tax cut induces firms to invest more in the short term, while a temporary dividend tax cut induces firms to cut back on investment in order to make large dividend payments in the short term. —Milagros Palacios

The study finds that government size (measured both by taxes and spending as a share of GDP) is negatively related to economic growth, while freedom to trade (measured by the Economic Freedom Index) is positively related to economic growth. The study also finds support for the notion that countries with big government can use economic openness to mitigate the negative growth effects of a large public sector since openness “allows welfare states to specialize in high value-added services.” Economic openness is measured in terms of the value of a country’s exports of goods and services as a share of GDP. —Charles Lammam

Labour market policy Reinhard Hujer and Stephan L. Thomsen (2010). How Do the Employment Effects of Job Creation Schemes Differ with Respect to the Foregoing Unemployment Duration? Labour Economics 17, 1: 38–51.

German job creation schemes

Government performance Andreas Bergh and Martin Karlsson (2010). Government Size and Growth: Accounting for Economic Freedom and Globalization. Public Choice 142, 1–2: 195–213. This study explores the relationship between government size and economic growth for a sample of “rich” countries from 1970 to 2005. Two measures of government size are used: total tax revenue and total expenditures as a share of gross domestic product (GDP). Unlike previous studies, this study examines the relationship between government size and economic growth while accounting for a country’s institutional quality as measured by the Fraser Institute’s Economic Freedom Index.

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Fotolia

The authors examine the impact of German job creation schemes on the likelihood of finding employment using administrative data on unemployed persons who did and did not participate in the programs. Job creation schemes provide subsidized work (for about 12 months) for unemployed persons. The goal of these schemes is to improve the unemployed person’s skills and qualifications and ultimately help them find regular employment after the program ends. The authors find that the effects of job creation schemes in both West and East Germany are disappointing. In West Germany, unemployed persons who participated in the programs generally did not experience increases in the likelihood of finding regular employment for up to 30 months after participation in the programs, compared to unemployed persons who did not participate in the programs. The findings for East Germany are even more disappointing since participation in the programs not only produced no significant increases in the likelihood of finding employment, but in some instances actually reduced the likelihood of finding employment. —Amela Karabegović

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Contraband tobacco in Canada Big Stock Photo

Do excise taxes encourage the black market? Nachum Gabler and Diane K atz

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he unlawful production, distribution and sale of cigarettes in Canada appears to have reached unprecedented levels in recent years (RCMP, 2008). There is ample evidence to show that tobacco excise taxes are a primary factor in the development and persistence of the contraband market (Gabler and Katz, 2010). Given the crime and other ill effects resulting from unlawful tobacco trafficking, a reevaluation of these excise taxes is warranted. Anti-smoking advocates and public health officials have long regarded tobacco taxes as an effective way to curb smoking. By inflating the cost of cigarettes, these taxes do discourage smoking to some extent, while generating additional revenues for the government.1 However,

high tobacco excise taxes also spur black market activity as pricesensitive consumers seek to evade taxation and traffickers cash in on the increased demand for cheaper tobacco products. Our analysis of the data on Canadian tobacco sales, contraband seizures, and smoking prevalence reveals that fluctuations in lawful tobacco sales and contraband tobacco seizures often move in tandem with changes in tobacco excise tax rates. Specifically, as taxes increase, legal tobacco sales decline and contraband tobacco seizures increase.

Tobacco excise taxes Figure 1 shows the levels of nominal and real federal excise taxes per

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carton of cigarettes between 1985 and 2009. The fluctuations in tax rates over the past two decades reflect a political tug-of-war between antismoking activists who favour higher tobacco taxes and policy makers who hope to shrink the contraband market by reducing taxes. The inverse relationship between higher taxes and lower lawful sales of cigarettes is well documented. A study by Gruber et al. (2003) estimated that a 10% increase in the price of cigarettes reduces lawful sales of cigarettes by approximately 4.5%. Another econometric estimate by Gospodinov and Irvine (2005) found that a 10% price increase results in a 3.1% decline in lawful cigarette sales over the long term, which suggests a

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Figure 1: Federal tobacco excise tax rates per carton, 1985 to 2009 20

Excise tax per carton in dollars

15

10

5

Real 2002 CDN $

Apr/2009

Apr/2007

Apr/2005

Apr/2003

Apr/2001

Apr/1999

Apr/1997

Apr/1995

Apr/1993

Apr/1991

Apr/1989

Apr/1987

Nominal CDN $ 0

Apr/1985

declining deterrent effect of tobacco taxation over time. Figure 2 shows lawful tobacco sales across Canada between 1980 and 2008. Apart from the period between 1994 and 1996, lawful cigarette sales across Canada have consistently declined, although the pace of the decline has varied. The changes in lawful cigarette sales appear to coincide with tobacco tax increases in the late 1980s and early 1990s, the subsequent tobacco tax rollback of 1994, and the reinstatement of relatively high tobacco taxes in the early 2000s. These fluctuations in lawful cigarette sales confirm that tax policy can have a discernible impact on the volume of tobacco lawfully sold in Canada.

Source: Canada, Department of Finance, 2009.

Smoking prevalence

26

Figure 2: Cigarette cartons sold per capita across Canada, 1980 to 2008 15

Cartons sold per capita

Inflating the cost of cigarettes by hiking excise taxes is intended to reduce smoking prevalence, as well as lawful sales of cigarettes. Smoking prevalence across Canada has been declining since the mid-1960s, falling from nearly 50% of Canadians aged 15 and over in 1965 to 17% by 2009 (figure 3).2 Tobacco use continued to decline between 1996 and 2001, when the prevalence of smoking among Canadians aged 15 and over decreased from 27% to 22% (Health Canada, 2010b; Statistics Canada, 1998a, 1998b). This decline occurred despite the repeal in tobacco excise taxes across Canada beginning in early 1994. Many anti-smoking activists claimed that any repeal of tobacco taxes would arrest the declining trend in smoking prevalence. Though it is possible that the pace of decline in smoking prevalence slowed somewhat following the rollback of tobacco taxes in 1994, the continued decline in smoking prevalence through the late 1990s, when tobacco taxes were relatively low, suggests that

12

9

6

3

1980

1984

1988

1992

1996

2000

2004

2008

Sources: Health Canada, 2010a; Statistics Canada, 2005, 2009.

tobacco tax reductions would not obstruct further declines in smoking prevalence, and would certainly not precipitate a spike in smoking prevalence. The decline in smoking prevalence has tapered off since 2005 (figure 3).

Fraser Forum September/October 2010

The decline in smoking prevalence across Canada indicates that anti-smoking efforts have been effective. A constellation of initiatives, including health risks awareness campaigns, smoking bans, restrictions on cigarette vending and

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Figure 3: Smoking prevalence among Canadians aged 15 and over, 1965 to 2009 50

30

20

10

0

Tobacco seizures 1965 1970 1974 1978 1981 1983 1985 1991 1994 1994/95 1996 1996/97 1998/99 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Smoking prevalence (%)

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Sources: Stephens, 1988; Health and Welfare Canada, 1992, 1993; Health Canada, 2010b; Statistics Canada, 1994, 1995a, 1995b, 1997, 1998a, 1998b; Physicians for a Smoke-Free Canada, 2009.

1,000

16

800

12

600

8

400

4

200

0

0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

20

Sources: RCMP, 2010b; Canada, Department of Finance, 2009.

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Number of cartons seized (â&#x20AC;&#x2122;000s)

Figure 4: Federal tobacco excise tax rate per carton, 1991 to 2005; and cigarette carton seizures across Canada, 1994 to 2008

Excise tax per carton in real 2002 CDN $

advertising, and warning labels, rather than tobacco taxes alone, are commonly cited in relation to the decline in smoking rates (Health Canada, 2002a, 2002b, 2006a, 2006b; US Dept. of Health and Human Services, 2000; NSRA, 2007, 2008). It is extremely difficult to disentangle the effects on smoking prevalence of higher tobacco taxes, public awareness of smoking risks, and restrictions on tobacco sales and use. All of these initiatives likely work in tandem.

The data on contraband cigarette seizures also reveal the impact of tax changes on black market activity. Increases in contraband seizures may be attributable to increased black market activity or increased interdiction efforts by law enforcement, or both. Therefore, it is likely that tobacco seizures reflect, at least to some degree, the extent of the contraband trade. Figure 4 shows contraband tobacco seizures by the RCMP across Canada between 1994 and 2009, with an overlay of federal tobacco excise taxes between 1991 and 2005 (in real 2002 Canadian dollars). The fluctuations in contraband seizures mirror the changes in the rate of tobacco taxation within a span of about three years.3 Tobacco seizures declined from a record-setting 456,333 cartons in 1994 following the tax rollback implemented that year, and began to climb in 2002 following the reinstatement of relatively high tobacco taxes. This suggests that there is a dynamic and responsive relationship between these two variables (RCMP, 2010). Though tobacco seizures are not a perfect indicator of contraband tobacco trade activity, it seems likely that increased tobacco seizures are indicative, to some

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extent, of increased contraband trade. As such, increases in tobacco seizures can be viewed as a proxy for increases in the volume of trade within Canadian contraband tobacco markets.

Conclusion It is evident that taxation as an anti-smoking initiative produces unintended consequences that undermine policy objectives. Contraband cigarettes are a near-perfect substitute for lawfully purchased cigarettes. Due to the extra costs imposed by taxes, many smokers are inclined to substitute away from lawful tobacco and purchase cheaper contraband. This substitution effect can be inferred by observing the coinciding fluctuations of lawful tobacco sales, contraband seizures (which can be viewed as an imperfect but useful proxy for contraband market activity), and changes in the rate of tobacco taxation. As such, tobacco taxes create the necessary incentives to compel smokers to turn to the black market to procure their tobacco. By offering smokers a cheap source of cigarettes, the contraband tobacco trade undermines the deterrent effect of higher taxation on smoking.

Notes 1 The federal and provincial governments collected $20.4 billion in tobacco taxes between 2001 and 2008. 2 There was considerable variation in the extent to which cigarette consumption fell across the provinces, as well as across gender and other cohorts. 3 There are two possible explanations for this slightly lagged effect: (1) it takes time for black market entrepreneurs to enter the trade, e.g., to secure sources of supply and establish a distribution network; and/or (2) it takes law en-

28

forcement time to catch up with the expansion in trade, e.g., to conduct surveillance, gather intelligence, and build cases.

References Canada, Department of Finance (2009). Federal Tobacco Excise Tax Schedule. Received upon request from DOFC Tax Policy Branch on July 7, 2009. Gabler, Nachum, and Diane Katz (2010). Contraband Tobacco in Canada: Tax Policies and Black Market Incentives. Fraser Institute. Gospodinov, Nikolay, and Ian J. Irvine (2005). A ‘Long March’ Perspective on Tobacco Use in Canada.. Canadian Journal of Economics 38, 2 (May): 375–84. <http://alcor. concordia.ca/~gospodin/research/ cje05.pdf>. Gruber, Jonathan, Anindya Sen, and Mark Stabile (2003). Estimating Price Elasticities When There is Smuggling: The Sensitivity of Smoking to Price in Canada. Journal of Health Economics 22: 821–42. <http://econwww.mit.edu/files/115>. Health and Welfare Canada (1992). Smoking Behaviour of Canadians: A National Alcohol and Other Drugs Survey Report, 1989. Health and Welfare Canada. Health and Welfare Canada (1993). Canada’s Health Promotion Survey 1990: Technical Report. Health and Welfare Canada. Health Canada (2002a). The Federal Tobacco Control Strategy: A Framework for Action. Health Canada. <http://w w w.hc-sc.gc.ca/hc-ps/ alt_formats/hecs-sesc/pdf/pubs/ tobac-tabac/ffa-ca/ffa-ca-eng.pdf>. Health Canada (2002b). The National Strategy: Moving Forward: The 2002 Progress Report on Tobacco Control. Health Canada. <http://www.hcsc.gc.ca/hc-ps/alt_formats/hecs-

Fraser Forum September/October 2010

sesc/pdf/pubs/tobac-tabac/prtcrelct-2002/prtc-relct-2002-eng.pdf>. Health Canada (2006a). The National Strategy: Moving Forward: The 2006 Progress Report on Tobacco Control. Health Canada. <http://www.hcsc.gc.ca/hc-ps/alt_formats/hecssesc/pdf/pubs/tobac-tabac/prtcrelct-2006/prtc-relct-2006-eng.pdf>. Health Canada (2006b). Ministerial Advisory Council on Tobacco Control – Biennial Report 2004–2006. Health Canada. <http://www.hc-sc. gc.ca/hc-ps/alt_formats/hecs-sesc/ pdf/pubs/tobac-tabac/2006-macccm/2006-mac-ccm-eng.pdf>. Health Canada (2010a). Cigarette/ Fine-Cut Sales 1980–2008: Canada. Health Canada. <http://www.hc-sc. gc.ca/hc-ps/alt_formats/hecs-sesc/ pdf/tobactabac/research-recherche/ indust/_sales-ventes/canada1-eng. pdf>. Health Canada (2010b). Canadian Tobacco Use Monitoring Survey (CTUMS): Smoking Prevalence 1999–2009. Health Canada. <http:// w w w.hc-sc.gc.ca/hc-ps/a lt _for mats/hecs-sesc/pdf/tobac-tabac/ research-recherche/stat/_ctumsesutc_prevalence/prevalence-19992009-eng.pdf>. Non-Smokers’ Rights Association [NSRA] (2007). Tobacco Smuggling and Contraband: A Deadly Threat to Tobacco Taxation, the Most Effective Public Health Strategy Used to Date to Lower Tobacco Consumption and a Threat to Millions in Government Revenues Needed for Health Care. NSRA. <http://w w w.nsra-adnf.ca/cms/ file/pdf/A_DEADLY_THREAT_ TO_TAXATION.pdf>. Non-Smokers’ Rights Association [NSRA] (2008). Time for Action on Cigarette Smuggling: Canadian Coalition for Action on Tobacco Calls for Urgent Action by Federal Government. News release (February 4). NSRA. <http://www.nsraadnf.ca/cms/index.cfm?group_ id=1501>.

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Physicians for a Smoke-Free Canada (2009). Smoking in Canada. Physicians for a Smoke-Free Canada. <http://www.smoke-free.ca/fact sheets/pdf/prevalence.pdf>.

Call for

Royal Canadian Mounted Police [RCMP] (2008). 2008 Contraband Tobacco Enforcement Strategy. RCMP. < ht t p : //w w w. rc mp - g rc . gc . c a / pubs/tobac-tabac/tobacco-tabacstrat-2008-eng.pdf>.

BOOKS

Royal Canadian Mounted Police [RCMP] (2010). 2009 Contraband Tobacco Statistics. RCMP. <http:// www.rcmp-grc.gc.ca/ce-da/tobactabac/stats-eng.htm>. Statistics Canada (1994). Health Status of Canadians: Report of the 1991 General Social Survey. Catalogue No. 11-612E. Statistics Canada.

out-of-print Fraser Institute

If you have been a Fraser Institute supporter for some years, you may have some of our books tucked away in your library. The following volumes are out of print, and we are on the hunt for a few copies for our archive.

Income and Taxation in Canada 1961-1975: Fraser Institute Technical Report 76-01 (1976)

Statistics Canada (1995a). The Survey on Smoking in Canada, 1994-1995. Statistics Canada.

Wage and Price Controls: Panacea for Inflation or Prescription for Disaster (1976)

Statistics Canada (1995b). National Population Health Survey 1994-95. Statistics Canada.

The Health Care Business: International Evidence on Private versus Public Health Care Systems (1979)

Statistics Canada (1997). General Social Survey, Cycle 10: Family (1995). Statistics Canada.

Zoning: Its Costs and Relevance for the 1980s (1980)

Statistics Canada (1998a). National Population Health Survey 1996-97. Statistics Canada. Statistics Canada (1998b). General Social Survey, Cycle 11: Social and Community Support (1996). Statistics Canada. Stephens, Thomas (1988). A Critical Review of Canadian Survey Data on Tobacco Use, Attitudes and Knowledge. Health and Welfare Canada. United States Department of Health and Human Services (2000). Economic Approaches. In Reducing Tobacco Use: A Report of the Surgeon General (Centers for Disease Control and Prevention): 295–360. <ht t p://w w w.cdc .gov/tobacco/ data_statistics/sgr/2000/complete_ report/pdfs/chapter6.pdf>. 

Rent Control: Myths and Realities (1981) Focus: On Economics and the Canadian Bishops (Focus No. 3, February 1983) Industrial Innovation: Its Place in the Public Policy Agenda (1984) Focus: On Employment Equity (Focus No. 17, 1985) Inside the Bank of Canada’s Weekly Financial Statistics: A Technical Guide (1985) Higher Education in Canada: An Analysis (1988) Education in Canada: An Analysis of Elementary, Secondary, and Vocational Schooling (1988)

The Market for Legal Services (1988) Economics and the Environment: A Reconciliation (1990) The Law and Economics of Competition Policy (1990) Continental Accord: North American Economic Integration (1991) Economic Freedom: Toward a Theory of Measurement: Proceedings of an International Symposium (1991) Poverty in Canada, 1st edition (1992) Healthy Incentives: Canadian Health Reform in an International Context (1996) Welfare—No Fair: A Critical Analysis of Ontario’s Welfare System (1985-1994) (1996) Economic Freedom of the World, 1997 Annual Report (1997) Global Warming: The Science and the Politics (1997) Beyond the Nass Valley: National Implications of the Supreme Court’s Delgamuukw Decision (2000)

If you have any of these books and are willing to part with them, please contact Kristin McCahon at the Fraser Institute at 604-688-0221 ext. 583, or e-mail kristin.mccahon@fraserinstitute.org and we can discuss the best way to get them to the Vancouver office. We appreciate any help you can give.


Milton Friedman’s ideas are alive and well Brett J. Skinner

T

his year, July 30 was the “Friedman Legacy for Freedom Day.” This annual spot on the calendar commemorates the intellectual contribution to the advancement of freedom made by the late Milton Friedman, renowned economist and Nobel laureate. A celebration of any scholar, even one The Economist magazine termed “the most influential economist of the second half of the 20th century … possibly of all of it,” is likely to get little attention even on a slow news day. But a commemorative day occurring on the eve of what was a mid-summer long weekend (in many provinces) risks going unnoticed altogether. Nevertheless, Milton Friedman’s legacy deserves attention since the high standard of living Canadians enjoy today is largely the result of public policies that reflect his thinking. Friedman’s ideas were profoundly influential. Among other things, he argued that free trade, lower taxes on income and capital, and a reduction in the burden of regulation would increase economic growth and improve social well-being. His ideas are now the basis of mainstream economic policy around much of world, including here in Canada. Friedman made significant contributions to the development and refinement of the ideas and policy prescriptions of the University of Chicago tradition, which was developed by Frank H. Knight, a former Canadian, Jacob Viner, and Henry Simons, among others. He is the acknowledged leader of the Chicago School of Monetary Economics, which transformed the world’s understanding of the causes of inflation and unemployment. Friedman’s approach to the study of economics and public policy was not ideological, but scientific. He put a rigorous methodological emphasis on the evidence-based

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study of public policy. In fact, Friedman’s scientific ethic was a key inspiration for the Fraser Institute’s motto: “If it matters, measure it.” In the context of the global financial and economic crisis of recent years, Friedman’s ideas and contributions to the science of economics are as relevant as ever. In 1963, he co-authored A Monetary History of the United States, demonstrating empirically that the speculative “bubble” conditions leading up to the 1929 stock market crash were encouraged by the Federal Reserve’s decision to extend easy credit by expanding the money supply too rapidly and for too long. He also showed that the economic depression that followed was exacerbated by ill-timed decisions to contract the money supply once the bubble popped. There is no doubt that Friedman was a giant among economists. Yet one of Friedman’s most important and under-appreciated contributions was to the study of politics. Friedman argued convincingly that economic freedom is a necessary pre-condition for political freedom. His book Capitalism and Freedom was an early statement of this idea. The idea led Milton, his wife Rose, and their long-time friend and Fraser Institute co-founder Michael Walker to initiate the process that created the Economic Freedom of the World Index. This index, which measures the degree of economic freedom around the world, demonstrates empirically that freer economies tend to be more prosperous. The body of research that has branched off from this project has gone on to show that economically freer societies are also more politically free. In theory, Friedman argued that “economic arrangements are important because of their effect on the continued on page 32

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NO NEED TO FEAR THE HST Niels Veldhuis and Charles Lammam

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ven with the harmonized sales tax (HST) now in place in British Columbia, opponents of the tax continue to fill newspapers, broadcast media, and the blogosphere with inaccurate—and often outrageous—claims about the tax and how it will affect British Columbians. These opponents tend to rely on anecdotes and poor research about the HST for their ammunition. While much has been said about the HST’s impact on investment, the total taxes we pay, and BC’s overall economy, we urge British Columbians to seek out the facts before believing the demagogues who call for its repeal. Here are 10 common myths about the HST that groups like the BC NDP, BC Conservatives, and Bill Vander Zalm’s Fight HST campaign are perpetuating; not one of these objections stands up to scrutiny.1

1

Myth: The HST is a “tax grab” that will increase government revenues.

2

Myth: The HST is a massive tax increase for average British Columbia families.

Reality: The HST is revenue neutral for the provincial government until 2011/2012, according to BC’s most recent budget forecasts. While the government will collect approximately $410 million more in sales tax revenues under the HST, it will also cut personal income taxes to offset the gain.

Reality: As a result of the offsetting personal income tax reductions, the HST will have virtually no impact on the total tax bill paid by the average family and will have no impact on BC’s Tax Freedom Day.

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3

Myth: The HST will hurt low income groups disproportionately. Reality: Under the HST, BC’s tax system will become slightly more progressive due to the reductions in provincial income taxes and the new HST credit. This means that most families with lower incomes will end up paying less tax overall, while most families with higher incomes will pay slightly more.

4

Myth: The HST will increase the price of all goods and services sold in BC.

5

Myth: The HST will increase the price of new homes by 7%.

Reality: The HST will have little impact on overall price levels in BC since the HST will eliminate the sales tax on business inputs and therefore will remove the PST embedded in the price of many goods and services. The price of goods and services that were previously exempt from PST will increase (though not by 7%), while the price of those things that were not exempt will decrease as businesses pass cost savings on to consumers. Past experience shows that sales tax harmonization in Newfoundland and Labrador, New Brunswick, and Nova Scotia in 1997, as well as Canada’s move to the GST from the Manufacturers’ Sales Tax (which applied to business inputs) in 1991, resulted in cost savings being passed on to consumers through lower prices.

Reality: Only new homes over $556,150 will see a modest after-tax price increase following introduction of the HST, but nowhere near 7%. For example, the after-tax

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price of a new $600,000 home will increase by approximately 0.3%.

6

Myth: The HST will shift the sales tax burden from businesses to average British Columbians. Reality: The burden of all taxes ultimately falls on people (as consumers, workers, or owners of shares in businesses, directly or through their retirement plans or RRSP accounts). The HST will simply eliminate around $2 billion in hidden sales taxes that British Columbians pay every year and make sales taxes more visible, which will make the tax system significantly more transparent.

7

Myth: The HST helps industry but hurts ordinary British Columbians.

Reality: The HST will make BC more competitive by dramatically reducing the tax penalty on business investment. Lower investment costs will spark more business investment, which will positively affect British Columbians through increased productivity, higher wages, increased job opportunities, and higher rates of economic growth.

8

Myth: The HST is complicated and will be a nightmare to comply with and administer.

9

Myth: The HST is an attack on specific sectors of the economy.

Reality: The HST will save BC businesses an estimated $150 million in annual tax compliance costs. These savings will, in large part, be passed on to consumers through lower prices. BC taxpayers will save another $30 million annually in government administration costs.

Reality: The HST will lead to a more uniform tax burden by broadening the tax base to include a wider array of goods and services, ensuring that fewer sectors will receive preferential treatment.

10

Myth: The HST will hurt BC’s economy as it rebounds from the recession.

Reality: The HST will help BC recover from the recession more quickly by making the province a more attractive place for investors to locate their capital and expand their operations. If the BC government is going to collect a 7% sales tax, then the HST is the cheapest, least damaging, and most efficient way of doing so. Neither the current

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government nor any subsequent government should repeal the HST.

Note 1 For additional details and a more complete discussion of these myths and realities, please refer to Lammam et al. (2010).

Reference Lammam, Charles, Niels Veldhuis, and Milagros Palacios (2010). Countering the Myths Surrounding British Columbia’s Harmonized Sales Tax. Fraser Institute. 

Milton Friedman’s ideas are alive and well continued from page 30 concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.” On the basis of fact, he concluded that “historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.” Friedman, who passed away in November 2006, was one of the world’s most eloquent advocates of freedom. He argued that the voluntary choices of individuals, not the dictates of government, should be the fundamental basis for public policy because such a foundation has been shown to produce better economic and social outcomes for people. Today, as we witness governments increasing public debts, proposing and imposing misguided economic regulations, and clinging to the fallacy that government spending can stimulate economic growth, it seems wise to consider the merit of Milton Friedman’s thoughts on freedom and his warnings about the unintended negative consequences of government intervention in the economy. 

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Fraser Forum - September/October 2010  

Fraser Forum is a bi-monthly review of public policy in Canada, with articles covering taxation, education, health care policy, and a wide r...

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